Netflix Is the Real Winner if the Supreme Court Sides With Aereo

As the Supreme Court hears a case that pits a tiny New York startup against the big TV networks, we could see a ruling that changes the face of television.

The tiny company is called Aereo, and if the court rules against it, it will probably vanish from the earth. “I think we’d be done,” says Chet Kanojia, the CEO of the embattled company, which lets you watch broadcast television channels on your computer, tablet, or smartphone using a clever hack of the airwaves.

But if the highest court in the land sides with Aereo and against the big TV broadcasters — which claim that Aero is effectively stealing copyrighted material because it doesn’t pay broadcasters for channels like cable companies do — the decision would reverberate well beyond Kanojia and company. It could suddenly remake the television landscape, shifting the balance of power even further onto the internet. That would change television so completely, Aereo might vanish from the earth, anyway. If the court goes with Aereo, it could give even more power to potential Aereo competitors like Netflix and Amazon, companies that are already working to redefine TV in so many other ways.

If the court goes with Aereo, it could give even more power to potential Aereo competitors like Netflix and Amazon, companies that are already working to redefine TV in so many other ways.

Aereo’s technology is wonderfully clever — and wonderfully simple. Users pay $8 for its service, and it assigns each one their own micro-antenna, storing these antennae by the thousands in warehouses across the country. When an Aereo user selects a show to watch on the Aereo app, the antenna sends a feed across the internet to that user, and that user only. So, it’s kind of like watching stuff with an old rabbit-eared television — except that the rabbit ears are somewhere on the other side of the internet.

The problem is that broadcasters — including NBC, CBS, ABC, and Fox — don’t like the arrangement. They believe Aereo should pay for all that TV content. After all, cable companies pay these broadcasters “retransmission fees” to access their programming and retransmit it to the public. While Aereo isn’t a cable company — and therefore, isn’t required by the FCC to pay those fees — broadcasters argue that, in the end, it’s not that different from a cable company.

Aereo, on the other hand, says that because every user gets his own antenna, its setup is similar to a user slapping a perfectly legal antenna on his TV to pick up broadcast signals. That argument worked in Aereo’s favor in several court cases in Boston and New York. But following Aereo’s big win in New York appellate court, the broadcasters appealed the Supreme Court to decide once and for all whether Aereo is operating legally.

There’s no doubt that a Supreme Court win is a must for Aereo. “If they lose, they’ll shut down. If they win, at least they get a chance to play,” says Randal Picker, a professor at The University of Chicago Law School. But a win also opens up a television world in which Aereo could have an awful lot of trouble competing.

Image: Aereo

A Netflix for Everything

Most notably, if the Court sides with Aereo, the broadcast networks may pull their free over-the-air content and become full-fledged paid cable companies themselves. If that happens, it would undercut the very technology Aereo’s been fighting to defend all along. Even Kanojia says the company has no contingency plan. Instead, he’s banking on the belief that the broadcasters are bluffing. “It’s just noise they’re making,” Kanojia tells us, adding that broadcasters would stand to lose billions of advertising revenue if they became paid cable companies.

But even if the broadcasters are bluffing, a Supreme Court ruling in favor of Aereo would also open the door for the NBCs and the ABCs to get into Aereo’s business themselves, potentially squeezing the small company out of the market. CBS head honcho Les Moonves recently told CNBC that if Aereo wins, he’s considering “forming our own Aereo with other networks.”

And that’s just a start. There are likely dozens of other players in the tech and television space who have been watching Aereo’s case and who will be interested in getting in on the action. Netflix is an obvious possibility. So is Amazon. Both companies are already working to move TV online. “Once the loophole is open, it’s no longer a strategic advantage for Aereo,” says Gartner media and marketing analyst Andrew Frank. “Maybe Netflix decides they’ll build some warehouses full of antennae and add that to their offerings.”

If you could get your movies, your House of Cards, your local news, and live sports all on one inexpensive app like Netflix, why would you bother with anything else?

Kanojia believes that Aereo’s intellectual property and first mover advantage would protect the company from potential competitors. But Netflix and Amazon could probably release a similar product — and fast — if they really wanted to. And this is just the sort of thing they might really want to do. Both companies are currently pushing technologies that let them deliver content via the net without the help of the incumbent broadcasters. Most notably, both Netflix and Amazon are now creating their own TV shows, such as the popular Netflix drama House of Cards. “We had over-the-air content. That’s the old days. Then we got cable content. Now we have all these distributors in the business of creating content,” says Picker.

What’s more, an Aereo-like Netflix service would have an immediate appeal. If you could get your movies, your House of Cards, your local news, and live sports all on one inexpensive app like Netflix, why would you bother with anything else?

As Picker points out, content creation is not Aereo’s business. Asked whether Aereo might get into this game, Kanojia said he was more interested in finding ways to improve the quality of Aereo’s current distribution than in increasing the amount of programming being distributed. So if Aereo wins, he says, his first order of business will be expanding geographically, releasing Aereo on more tech platforms, like Google Chromecast, and trying to access more bandwidth for improved streaming. “It’s better to focus on our narrow niche for now, improve quality, and make sure it sustains,” he said. Netflix and Amazon, he believes, are “different pieces of the pie.”

That’s what you’d expect him to say. But if Aereo wins its case, it seems the smartest thing Kanojia could do is ready the company for a sale to a larger competitor down the line. While Kanojia says that’s not his goal, he’s not ruling it out completely, either. “The question is: can you move the ball forward? If you can, you go at it as hard as you can. If you can’t then you consider alternatives,” he said.

In all likelihood, experts say, the Supreme Court will vote in favor of the broadcasters. “The Supreme Court is generally reluctant to issue decisions that will be extremely disruptive to the status quo of business,” says Frank. “This would be an extremely disruptive decision that would take us into uncharted territory.” This is certainly true. But that doesn’t mean it won’t happen. And if it does, chalk up another win for Amazon and Netflix.